One Shining IPO Won’t Lift Clouds Over Solar Industry

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Even by the standards of this year’s stop-and-go IPO market, SolarCity’s (NASDAQ:SCTY) path to the public markets was a bumpy one. At the end of November, the company yanked its deal only hours before the stock was set to begin trading – the same fate that had met another solar/cleantech company, BrightSource Energy, this spring. Only after the company’s backers and management jumped back in to the marketing fray – reminding potential institutional investors that it isn’t a maker of solar panels, but an installer – and after the company tweaked the terms of the deal, did SolarCity manage to get out of the gate last week.

At least on one count, the deal was a slam-dunk success, with shares soaring 47 percent to close at $11.79 a share on Thursday, its first day of trading. It closed Friday’s trading at $11.72. That’s still lower than the $13 to $15 range that the company had hoped to obtain for the stock. Moreover, the company’s chairman, Elon Musk (co-founder of PayPal and Tesla Motors), agreed that rather than treating the IPO as an opportunity to liquidate some of his holdings, he would actually buy stock of the company in the deal. Venture firm Draper Fisher Jurvetson, among other early investors, agreed to do the same, reaffirming the commitment of backers to stick around for the long haul and giving institutional investors the confidence to follow suit.

To insiders in the green technology/cleantech universe, the wariness surrounding SolarCity is just a little bit irrational, as they wonder why investors can’t seem to discriminate between manufacturers of solar panels (like the ill-fated Solyndra), which are grappling with a glut of their products, and companies who are the “buy” side of the market. The latter – like SolarCity – are benefitting from the low prices for solar panels, and high consumer demand for the devices. (Similarly, Brightsource develops power plants based on large-scale solar networks that use mirrors.)

True, while SolarCity may be helping its customers generate power, it hasn’t managed to generate profits just yet, and investors – post Facebook (NASDAQ: FB) – have demonstrated a clear preference for established business models and profitability. CEO Lyndon Rive, who along with his brother Peter founded SolarCity, told Bloomberg TV after the IPO finally made it to market that the company’s goal remains being cash-flow positive by the end of next year. But that’s not all that unusual among those venture-backed companies that do make it to the IPO market, and sales are growing at a rapid clip – up to $103 million in the first nine months of 2012, a gain of 166 percent over 2011 levels, according to its financial statements filed with the SEC.

One of the wild cards that SolarCity does need to contend with is what will happen to natural gas prices in the coming months and years. If the flurry of new gas discoveries can be brought on stream and transported to markets at a profit, that could depress natural gas prices to the point where it makes less sense for consumers motivated by economics rather than environmental considerations to make the switch to solar.

But cleantech bankers – yes, there are a dedicated and identifiable group of these folks – are hoping that SolarCity breaks what has begun to feel to many of them like a jinx. While the fundamentals for most parts of this world seem healthy – installation of solar photovoltaic capacity climbed 44 percent in the third quarter over year-earlier levels – the track record of most of the companies that have struggled across the IPO finish line has been underwhelming, or dismal. Enphase Energy (NASDAQ: ENPH), which makes components for solar power generating systems, had an impressive first-day gain of 22 percent when it went public in March – and now trades nearly 60 percent below that IPO price (which, in turn, had been cut nearly in half from pre-IPO targets).

While the success of the SolarCity IPO can be viewed as a glimpse of light through the clouds, the sector remains deeply unloved by investors – witness the lengths to which bankers and backers of SolarCity had to go through to push their IPO through. Certainly, it’s premature to look at SolarCity’s IPO and celebrate a revival in this arena. For one thing, too many of the companies are akin to utilities or even act like them. BrightSource, for instance, sells the power from its solar thermal energy plants to utilities. The industry is vulnerable to competition from other commodity markets. Sometimes, the rates the companies can charge for their power must be approved by regulators.

The solar problem has become a problem for cleantech – a larger category that includes smart power-grid management technology companies, among many others. To many non-specialized investors (and to the retail investors who have found the specialized funds underwhelming), cleantech means solar, and solar means losses of the kind that led to the demise of Solyndra and A123 Systems, a battery manufacturer. It’s another example of too much hype meeting too much reality too rapidly – and doing so in the midst of a volatile and uncertain market environment.

Some of these cleantech companies may well prove to be franchises that you will want to own for the long haul, as the North American power grid slowly refashions itself to adjust to new realities, from the host of new fossil fuel discoveries to the fresh emphasis on renewable energy sources. Just don’t be tempted to read too much into a one-day pop on a discounted deal like that of SolarCity.

Odds are that even though this company will continue to execute on its business model, its gains won’t be dramatic enough to satisfy investors looking for a rapid path to profitability, and the share price will come under pressure in the short to medium-term. It’s a theme, and a stock, for the patient investor.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.